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================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 --------------

                                   FORM 10-QSB

                                   (MARK ONE)

------
  X            QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
------                              EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007

------
                 TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
------                     SECURITIES EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                        COMMISSION FILE NUMBER 000-12950

                                 --------------

                          ALLIANCE PHARMACEUTICAL CORP.
                 (Name of Small Business Issuer in Its Charter)

               NEW YORK                                  14-1644018
   (State or other jurisdiction of          (I.R.S. Employer Identification No.)
   incorporation or organization)

      7590 FAY AVENUE, SUITE 402                           92037
         LA JOLLA, CALIFORNIA
(Address of Principal Executive Offices)                 (Zip Code)


         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 410-5200
--------------------------------------------------------------------------------
              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                         IF CHANGED SINCE LAST REPORT)

      Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

      Common Stock, $0.01 par value per share, 150,000,000 shares authorized,
59,581,247 shares issued and outstanding at February 8, 2008.

      Transitional Small Business Disclosure Format (check one). Yes |_| No |X|



<Page>

ALLIANCE PHARMACEUTICAL CORP.


INDEX

                                                                        Page No.
                                                                        --------

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed Consolidated Balance Sheet (unaudited)                     3

          Condensed Consolidated Statements of Operations (unaudited)          4

          Condensed Consolidated Statements of Cash Flows (unaudited)          5

          Notes to Unaudited Condensed Consolidated Financial Statements       6

Item 2.   Management's Discussion and Analysis or Plan of Operation           14


Item 3.   Controls and Procedures                                             17


PART II - OTHER INFORMATION

Item 1.   Legal Proceedings                                                   18

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds         18

Item 3.   Defaults Upon Senior Securities                                     18

Item 4.   Submission of Matters to a Vote of Security Holders                 19

Item 5    Other Information                                                   19

Item 6.   Exhibits                                                            19


                                       2



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<TABLE>
<CAPTION>
<S>                                                                        <C>
PART I FINANCIAL INFORMATION:

Item 1. Financial Statements

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------

                                                                         DECEMBER 31, 2007
                                                                        ------------------
ASSETS                                                                      (UNAUDITED)
------
CURRENT ASSETS:
    Cash and cash equivalents                                              $     136,000
    Other current assets                                                          89,000
                                                                           -------------
            Total current assets                                                 225,000

PROPERTY AND EQUIPMENT - NET                                                     106,000
OTHER ASSETS                                                                      16,000
                                                                           -------------
                                                                           $     347,000
                                                                           =============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
    Accounts payable                                                       $     231,000
    Accrued expenses                                                             106,000
    Deferred revenue                                                             100,000
    Senior notes payable and accrued interest                                 10,656,000
                                                                           -------------
            Total current liabilities                                         11,093,000

OTHER LIABILITIES                                                                750,000
                                                                           -------------

            Total liabilities                                                 11,843,000
                                                                           -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
    Preferred stock - $0.01 par value; 5,000,000 shares authorized;
       Series F preferred stock - 793,750 shares issued and outstanding,
       liquidation preference of $31,750,000                                       8,000
    Common stock - $0.01 par value; 150,000,000 shares authorized;
       59,581,247 shares issued and outstanding                                  596,000
    Additional paid-in capital                                               486,709,000
    Accumulated deficit                                                     (498,809,000)
                                                                           -------------
            Total stockholders' deficit                                      (11,496,000)
                                                                           -------------
                                                                           $     347,000
                                                                           =============

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                             3



<Page>

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------

                                                    THREE MONTHS ENDED               SIX MONTHS ENDED
                                                        DECEMBER 31,                   DECEMBER 31,
                                                   2007            2006            2007            2006
                                               ------------    ------------    ------------    ------------
                                                        (UNAUDITED)                     (UNAUDITED)
REVENUES:
   Royalty, license and research               $         --    $         --    $     57,000    $     27,000

OPERATING EXPENSES:
   Research and development                          91,000         735,000         260,000       1,338,000
   General and administrative                       194,000         604,000         491,000         879,000
                                               ------------    ------------    ------------    ------------
                                                    285,000       1,339,000         751,000       2,217,000
                                               ------------    ------------    ------------    ------------
LOSS FROM OPERATIONS                               (285,000)     (1,339,000)       (694,000)     (2,190,000)

INVESTMENT INCOME                                     4,000          34,000          14,000          77,000
OTHER INCOME                                             --              --         163,000              --
INTEREST EXPENSE                                   (222,000)       (242,000)       (465,000)       (490,000)
LOSS ON MODIFICATION OF DEBT                             --              --         (14,000)             --
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY             --         130,000              --         357,000
GAIN ON DISPOSITION OF ASSETS                            --         659,000              --         659,000
                                               ------------    ------------    ------------    ------------
NET LOSS                                       $   (503,000)   $   (758,000)   $   (996,000)   $ (1,587,000)
                                               ============    ============    ============    ============

NET LOSS PER COMMON SHARE,
   BASIC AND DILUTED                           $      (0.01)   $      (0.02)   $      (0.02)   $      (0.04)
                                               ============    ============    ============    ============

WEIGHTED AVERAGE SHARES OUTSTANDING,
   BASIC AND DILUTED                             55,156,000      39,649,000      52,236,000      38,883,000
                                               ============    ============    ============    ============


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                                      4



<Page>

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------

                                                                               Six Months Ended December 31,
                                                                                  2007              2006
                                                                             --------------    --------------
                                                                                      (UNAUDITED)
OPERATING ACTIVITIES:
     Net loss                                                                $     (996,000)  $    (1,587,000)
     Adjustments to reconcile net loss to net cash
        used in operating activities:
            Depreciation and amortization                                            19,000            16,000
            Loss on modification of debt                                             14,000                --
            Accrued interest on senior notes                                        465,000           490,000
            Compensatory stock options                                               24,000            30,000
            Change in fair value of derivative liability                                 --          (357,000)
            Gain on disposition of assets                                                --          (659,000)
            Changes in operating assets and liabilities:
               Other assets                                                         (35,000)           29,000
               Accounts payable, accrued expenses and other                        (228,000)          329,000
                                                                             --------------    --------------
Net cash used in operating activities                                              (737,000)       (1,709,000)
                                                                             --------------    --------------

INVESTING ACTIVITIES:
     Purchases of property and equipment                                                 --           (74,000)
     Proceeds from disposition of assets                                                 --           100,000
                                                                             --------------    --------------
Net cash provided by investing activities                                                --            26,000
                                                                             --------------    --------------


DECREASE IN CASH AND CASH EQUIVALENTS                                              (737,000)       (1,683,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    873,000         3,643,000
                                                                             --------------    --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   $      136,000    $    1,960,000
                                                                             ==============    ==============

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
     Issuance of common stock upon conversion of senior notes and interest   $    2,173,000    $      438,000
                                                                             ==============    ==============
     Reclassification of derivative liability                                $           --    $      484,000
                                                                             ==============    ==============


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                                       5
</TABLE>



<Page>

ALLIANCE PHARMACEUTICAL CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                  THREE AND SIX MONTHS ENDED DECEMBER 31, 2007

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

      Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company," "Alliance," "we" or "us") are engaged in identifying, designing and
developing novel medical products. Currently, the Company is focused on
developing its lead product, OXYGENT(TM), an intravascular oxygen carrier
designed to augment oxygen delivery in surgical patients at risk of acute tissue
hypoxia (oxygen deficiency).

LIQUIDITY AND BASIS OF PRESENTATION

      The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has incurred
operating losses through December 31, 2007 and has negative working capital at
that date of approximately $10.9 million. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.

      As discussed in Note 3, in June 2004, the Company completed a private
placement financing with gross proceeds to the Company of approximately $11
million from the sale of common stock (the "June 2004 Private Placement"). In
September 2004, the terms of the June 2004 Private Placement were renegotiated
by mutual agreement of the Company and investors holding approximately $10.7
million of the original $11 million invested by the various investors in the
June 2004 Private Placement. As a result, the investors who elected to rescind
the June 2004 Private Placement were issued senior convertible promissory notes
in like investment amounts (the "Senior Notes"), which, unless previously
converted, matured and the unpaid principal, together with accrued interest,
became due and payable on April 1, 2007. Upon maturity, the Company requested
that each holder of a Senior Note execute an amendment to extend the maturity
date of the Senior Note from April 1, 2007 to June 30, 2008 if certain
conditions were met. The Company was unable to satisfy such conditions. The
Company believes its current working capital is sufficient to fund operations
through February 2008; however, the Company does not have the resources to repay
the Senior Notes, which are currently in default. The Company is continuing to
seek additional financing to fund its continuing operations through June 2008.
Because adequate funds have not been available to the Company in the past, the
Company has already delayed its OXYGENT development efforts and has delayed,
scaled back, and/or eliminated one or more of its other product development
programs. The accompanying unaudited condensed consolidated financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

PRINCIPLES OF CONSOLIDATION

      The accompanying unaudited condensed consolidated financial statements
include the accounts of Alliance Pharmaceutical Corp., the accounts of its
wholly owned subsidiary, Molecular Biosystems, Inc. ("MBI"), and its
majority-owned subsidiaries, Talco Pharmaceutical, Inc. and PFC Therapeutics,
LLC ("PFC Therapeutics"). All significant intercompany accounts and transactions
have been eliminated.

INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. These principles are consistent in all material respects with those
applied in the Company's consolidated financial statements contained in the
Company's annual report on Form 10-KSB for the fiscal year ended June 30, 2007,
and pursuant to the instructions to Form 10-QSB and Item 310(b) of Regulation
S-B promulgated by the Securities and Exchange Commission (the "SEC"). Interim
financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (all of which are of a normal recurring nature, including the
elimination of intercompany accounts) necessary to present fairly the financial
position, results of operations and cash flows of the Company for the periods
indicated. Interim results of operations are not necessarily indicative of the
results to be expected for the full year or any other interim periods. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
contained in the Company's annual report on Form 10-KSB for the year ended June
30, 2007.

                                       6


<Page>

USE OF ESTIMATES

      The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the condensed consolidated
financial statements. Significant estimates made by management include, among
others, recoverability of property and equipment and the valuation of deferred
tax assets, stock options and derivative liabilities. Actual results could
differ from these estimates.

CASH AND CASH EQUIVALENTS

      The Company considers instruments purchased with an original maturity of
three months or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK

      Cash and cash equivalents are financial instruments that potentially
subject the Company to a concentration of credit risk. The Company places its
cash with high quality financial institutions and at times may have deposits
which exceed the Federal Deposit Insurance Corporation (the "FDIC") $100,000
insurance limit. At December 31, 2007, the Company had approximately $44,000 in
these accounts in excess of the FDIC insurance limits.

PROPERTY AND EQUIPMENT

      Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to five years. Major betterments and renewals are capitalized, while
routine repairs and maintenance are charged to expense when incurred.

      The Company assesses the recoverability of property and equipment by
determining whether such assets can be recovered through projected undiscounted
cash flows. The amount of impairment, if any, is measured based on fair value
and is charged to operations in the period in which impairment is determined by
management. At December 31, 2007, management has determined that there is no
impairment of property and equipment. There can be no assurance, however, that
market conditions will not change, which could result in future property and
equipment impairment.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS

      As a result of the amendment to its Senior Note Amended Purchase Agreement
and Registration Rights Agreement in April 2006 (the "2006 Amendment") (see Note
3), the Company did not have a sufficient number of authorized shares to settle
outstanding and exercisable options, warrants and convertible instruments until
November 14, 2006, when the Company's shareholders, at its Annual Meeting,
approved an amendment of the Company's Certificate of Incorporation, as amended,
to increase the number of authorized shares of common stock from 125 million to
150 million shares. The amendment was filed with the Secretary of State of the
State of New York on December 15, 2006. Under the provisions of Emerging Issues
Task Force ("EITF") Issue No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," as a
result of the 2006 Amendment, the Company was required to classify all
non-employee options and warrants as derivative liabilities, with an aggregate
fair value totaling $3.5 million as of the 2006 Amendment date, and record them
at their fair values at the date of the 2006 Amendment. Any change in fair value
was required to be recorded as non-operating, non-cash income or expense at each
subsequent balance sheet date until the Company had a sufficient number of
authorized shares to settle its convertible instruments and non-employee options
and warrants, which date was November 14, 2006. At the date of the 2006
Amendment, the Company reclassified the fair value of non-employee options and
warrants of $3.5 million from additional paid-in capital to derivative
liability. On November 14, 2006, the date of the approval of the increase in
authorized shares, the Company reclassified the fair value of the derivative
liability of $484,000 to additional paid-in capital. During the six months ended
December 31, 2006, the Company recognized other income of $357,000 related to
recording the derivative liability at fair value.

      Warrant-related derivatives were valued using the Black-Scholes Option
Pricing Model with the following assumptions for the six months ended December
31, 2006: annual volatility of 165%; dividend yield of 0%; and risk free
interest rate of 4.95%.

                                       7


<Page>

REVENUE RECOGNITION

      The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS," as
revised by SAB No. 104. As such, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, or services have
been performed, the price is fixed or readily determinable and collectibility is
probable.

      Revenue is deferred until all contractual obligations have been satisfied.

      RESEARCH AND DEVELOPMENT REVENUES UNDER COLLABORATIVE AGREEMENTS

      Research and development revenues under collaborative agreements are
recognized as the related expenses are incurred, up to contractual limits.
Payments received under these agreements that are related to future performance
are deferred and recorded as revenue as they are earned over the specified
future performance period. Revenue related to nonrefundable, upfront fees are
recognized over the period of the contractual arrangements as performance
obligations related to the services to be provided have been satisfied. Revenue
related to milestones is recognized upon completion of each milestone's
performance requirement.

      LICENSING AND ROYALTY REVENUES

      Licensing and royalty revenues for which no services are required to be
performed in the future are recognized immediately, if collectibility is
reasonably assured.

      RAW MATERIAL REVENUES

      The Company recognizes revenues from the sales of raw material upon
shipment, at which time title transfers and the Company has no further
obligation. Such sales in the amount of $163,000 were recorded during the six
months ended December 31, 2007 in connection with raw material that the Company
does not market. Inventory associated with the sales of these raw materials is
carried at zero value. The amounts earned for these sales were recorded as other
income in the accompanying condensed consolidated statements of operations.

RESEARCH AND DEVELOPMENT EXPENSES

      Research and development expenditures are charged to expense as incurred.
Research and development expenditures include the cost of salaries and benefits
for clinical, scientific, manufacturing, engineering and operations personnel,
payments to outside researchers for preclinical and clinical trials and other
product development work, payments related to facility lease and utility
expenses, depreciation and amortization, patent costs, as well as other
expenditures. During the six-month periods ended December 31, 2007 and 2006, the
Company incurred research and development expenses of approximately $260,000 and
$1.3 million, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amount of certain of the Company's financial instruments as
of December 31, 2007 approximates their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash and
cash equivalents, accounts payable, accrued expenses and other liabilities. The
carrying value of debt approximates fair value as the related interest rate
approximates a rate currently available to the Company.

COMPUTATION OF NET LOSS PER COMMON SHARE

      Basic loss per share was computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. All potential
dilutive common shares have been excluded from the calculation of diluted loss
per share for the six months ended December 31, 2007 and 2006, as their
inclusion would be anti-dilutive. The outstanding potentially dilutive common
shares totaled approximately 63,317,000 and 67,136,000 at December 31, 2007 and
2006, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION

      At December 31, 2007, the Company has two stock-based employee
compensation plans.

      On July 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No.
123") (revised 2004), "SHARE-BASED PAYMENT" ("SFAS No. 123(R)"), which
establishes standards for the accounting of transactions in which an entity
exchanges its equity instruments for goods or services, primarily focusing on
accounting for transactions where an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires a public entity to

                                       8


<Page>

measure the cost of employee services received in exchange for an award of
equity instruments, including stock options, based on the grant-date fair value
of the award and to recognize it as compensation expense over the period the
employee is required to provide service in exchange for the award, usually the
vesting period. SFAS No. 123(R) supersedes the Company's previous accounting
under Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES" ("APB 25") for periods beginning in the Company's fiscal 2007. In
March 2005, the SEC issued SAB No. 107 relating to SFAS No. 123(R). The Company
has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R).

      The Company adopted SFAS No. 123(R) using the modified prospective
transition method, which required the application of the accounting standard as
of July 1, 2006, the first day of the Company's fiscal year 2007. The Company's
condensed consolidated financial statements as of and for the three and six
months ended December 31, 2007 and 2006 reflect the impact of adopting SFAS No.
123(R). In accordance with the modified prospective transition method, the
Company's condensed consolidated financial statements for prior years have not
been restated to reflect, and do not include, the impact of SFAS No. 123(R).

      SFAS No. 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company's
condensed consolidated statements of operations. Prior to the adoption of SFAS
No. 123(R), the Company accounted for stock-based payments to employees and
directors using the intrinsic value method in accordance with APB 25 as allowed
under SFAS No. 123 and, as such, generally recognized no compensation cost for
employee stock options.

      Stock-based compensation expense recognized during the period is based on
the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Stock-based compensation expense recognized
in the Company's condensed consolidated statements of operations for the three
and six months ended December 31, 2007 and 2006 included compensation expense
for share-based payment awards granted prior to, but not yet vested as of June
30, 2006, based on the grant date fair value estimated in accordance with the
pro forma provisions of SFAS No. 123 and compensation expense for the
share-based payment awards granted subsequent to June 30, 2006 based on the
grant date fair value estimated in accordance with the provisions of SFAS No.
123(R). As stock-based compensation expense recognized in the condensed
consolidated statements of operations for the three and six months ended
December 31, 2007 and 2006 is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The estimated average
forfeiture rate for the three and six months ended December 31, 2007 and 2006 of
approximately 2% was based on historical forfeiture experience and estimated
future employee forfeitures. The estimated term of option grants for the three
and six months ended December 31, 2007 and 2006 was seven years. In the
Company's pro forma information required under SFAS No. 123 for the periods
prior to fiscal 2007, the Company accounted for forfeitures as they occurred.

      SFAS No. 123(R) requires cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash flows. Due to the Company's
loss position, there were no such tax benefits during the three and six months
ended December 31, 2007 and 2006. Prior to the adoption of SFAS No. 123(R),
those benefits would have been reported as operating cash flows had the Company
received any tax benefits related to stock option exercises.

DESCRIPTION OF PLANS

      The Company's stock option plans provide for grants of options to
employees and directors of the Company to purchase the Company's shares, as
determined by management and the board of directors, at the fair value of such
shares on the grant date. The options generally vest over a four- to five-year
period beginning on the date of grant or up to one year after the date of grant
and have a ten-year term. As of December 31, 2007, the Company is authorized to
issue up to 8,100,000 shares under these plans and has 4,039,610 shares
available for future issuance.

SUMMARY OF ASSUMPTIONS AND ACTIVITY

      The fair value of stock-based awards to employees and directors is
calculated using the Black-Scholes Option Pricing Model, even though the model
was developed to estimate the fair value of freely tradable, fully transferable
options without vesting restriction, which differ significantly from the
Company's stock options. The Black-Scholes model also requires subjective
assumptions regarding future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The expected term of
options granted is derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate selected to
value any particular grant is based on the U.S. Treasury rate that corresponds
to the pricing term of the grant effective as of the date of the grant. The
expected volatility is based on the historical volatility of our common stock.
These factors could change in the future, affecting the determination of
stock-based compensation expense in future periods.

                                       9


<Page>

      The fair value of options at date of grant was estimated using the
Black-Scholes Option Pricing Model with the following assumptions for the three
and six months ended December 31, 2006: risk-free interest rate range of 4.95%
to 5.05%; dividend yield of 0% for both periods; volatility factor of 267%; and
a weighted-average expected term of seven years for both periods.

      A summary of option activity as of December 31, 2007 and changes during
the six months then ended is presented below:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31, 2007
                                                         --------------------------------------------------------
                                                                            WEIGHTED-AVERAGE
                                                                        -----------------------
                                                                                     REMAINING
                                                                                    CONTRACTUAL    AGGREGATE
                                                                         EXERCISE      TERM        INTRINSIC
                                                              SHARES       PRICE      (YEARS)        VALUE
                                                         --------------------------------------------------------
<S>                                                         <C>            <C>          <C>         <C>
Options outstanding at July 1, 2007                         2,817,000      $  4.20      6.75
Options granted                                                     -
Options forfeited/expired                                     (50,700)     $ 46.84
Options exercised                                                   -
                                                         --------------------------
Options outstanding at December 31, 2007                    2,766,300      $  3.42      6.36        $       -
                                                         ========================================================
Unvested options expected to vest at December 31, 2007        534,100      $  0.22      7.37        $       -
                                                         --------------------------------------------------------
Options exercisable at December 31, 2007                    2,221,300      $  4.20      6.11        $       -
                                                         ========================================================
</TABLE>

      There were no options granted or exercised during the six months ended
December 31, 2007. There were 57,500 options granted and no options exercised
during the six months ended December 31, 2006. Upon the exercise of options, the
Company issues new shares from its authorized shares.

      As of December 31, 2007, there was approximately $35,000 of total
unrecognized compensation costs related to employee and director stock option
compensation arrangements. That cost is expected to be recognized on a
straight-line basis over the next four years on average. The total fair value of
shares vested during the six months ended December 31, 2007 related to employee
and director options was approximately $18,000 and the total fair value of
shares vested during the six months ended December 31, 2007 related to options
issued to consultants was approximately $6,000, net of an estimated forfeiture
rate of 2%.

      The Company allocated $18,000 of the stock-based compensation expense
related to employee and director stock options to general and administrative
expenses and $6,000 of the stock-based compensation expense related to
consultant stock options to research and development expenses.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48"). This interpretation
clarifies the application of SFAS No. 109, "ACCOUNTING FOR INCOME TAXES" by
defining criteria that an individual tax position must meet for any part of the
benefit of that position to be recognized in a company's financial statements
and also provides guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company adopted FIN 48 on July 1, 2007. The Company is currently
assessing the impact the adoption of FIN 48 will have on its financial position
and results of operations.

      In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE
MEASUREMENTS". SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accounting principals generally accepted in the U.S. and
expands disclosures about fair value measurements. The statement does not
require new fair value measurements, but is applied to the extent that other
accounting pronouncements require or permit fair value measurements. SFAS No.
157 emphasizes that fair value is a market-based measurement that should be
determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies that have assets and liabilities
measured at fair value will be required to disclose information that enables the
users of its financial statements to access the inputs used to develop those
measurements. The reporting entity is encouraged, but not required, to combine
the fair value information disclosed under this statement with the fair value
information disclosed under other accounting pronouncements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company
expects to adopt SFAS No. 157 on July 1, 2008. The Company is currently
assessing the impact the adoption of SFAS No. 157 will have on its consolidated
financial statements.

                                       10


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      In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES". SFAS No. 159 permits entities to
choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. SFAS No. 159 does
not establish requirements for recognizing and measuring dividend income,
interest income, or interest expense. This statement does not eliminate
disclosure requirements included in other accounting standards. SFAS No. 159 is
effective in fiscal years beginning after November 15, 2007. The Company expects
to adopt SFAS No. 159 on July 1, 2008. The Company is in the process of
evaluating the provisions of the statement, but does not anticipate that the
adoption of SFAS No. 159 will have a material impact on its consolidated
financial statements.

      In December 2007, the FASB issued SFAS No. 141(R), "BUSINESS COMBINATIONS"
("SFAS No. 141(R)"). SFAS No. 141(R) requires acquiring entities in a business
combination to recognize the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors the information they need to evaluate and
understand the nature and financial effect of the business combination. SFAS No.
141(R) is effective in fiscal years beginning after December 15, 2008. The
Company expects to adopt SFAS No. 141(R) on July 1, 2009. The Company is
currently assessing the impact the adoption of SFAS No. 141(R) will have on its
consolidated financial statements.

      In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTERESTS
IN CONSOLIDATED FINANCIAL STATEMENTS" ("SFAS No. 160"). SFAS No. 160 requires
entities to report noncontrolling (minority) interests in subsidiaries as equity
in the consolidated financial statements. SFAS No. 160 is effective in fiscal
years beginning after December 15, 2008. The Company expects to adopt SFAS No.
160 on July 1, 2009. The Company is currently assessing the impact the adoption
of SFAS No. 160 will have on its consolidated financial statements.

2.    PFC THERAPEUTICS, LLC

      On December 22, 2004, PFC Therapeutics and LEO Pharma A/S ("LEO"), one of
the leading Danish research-based pharmaceutical companies that markets
significant products within the fields of dermatology, metabolic and
cardiovascular diseases and ophthalmology and antibiotics, signed an exclusivity
agreement to enter into a license agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe (EU member countries, EU
membership applicants, Norway and Switzerland) and Canada (the "LEO Exclusivity
Agreement"). The terms of the license agreement, if entered into, will include
certain initial and future payments to PFC Therapeutics upon the completion of
various regulatory and commercial milestones for OXYGENT development in Europe
and royalties on commercial sales of OXYGENT in Europe and Canada. On January 5,
2005, the Company received the non-refundable portion of an exclusivity fee of
$100,000 per the terms of the LEO Exclusivity Agreement. Because the amendment
discussed below extends LEO's due diligence time-period, this amount has been
deferred and is included in current liabilities in the accompanying condensed
consolidated balance sheet at December 31, 2007.

      On February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO
Exclusivity Agreement. The amendment extends the period of time in which LEO may
undertake its due diligence investigation from March 1, 2005 to a date that is
sixty (60) days after submission by the Company to LEO of the results of a Phase
2b postoperative ileus clinical study in surgery patients, which was being
conducted by the Company to confirm the results of an earlier study. In
November, the Company discontinued enrollment in the study and is evaluating the
incorporation of the physiological endpoint of improvement in postoperative
bowel function into the China Phase 2 study described below. The remaining terms
of the LEO Exclusivity Agreement remain in full force and effect, provided that
any definitive license agreement entered into between PFC Therapeutics and LEO
relating to the marketing and commercialization of OXYGENT will include an
additional milestone payment, the amount of which is to be proposed by Alliance,
relating to the postoperative ileus endpoint.

      On May 16, 2005, PFC Therapeutics and Beijing Double-Crane Pharmaceutical
Co., Ltd. ("Double-Crane"), the market leader for IV solutions and one of the
largest pharmaceutical companies in the People's Republic of China (the "PRC"),
entered into a development, license and supply agreement ("Double-Crane
Agreement") for the development of OXYGENT in the PRC. Pursuant to the
Double-Crane Agreement, Double-Crane made an upfront license fee payment and
will make certain milestone and royalty payments to the Company. The upfront
license fee of $500,000 was deferred until the Company's obligations to perform
were satisfied. These obligations included the transfer and translation of all
technology, preclinical, clinical and regulatory data necessary for

                                       11


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Double-Crane's clinical development and Investigational New Drug ("IND")
application to the State Food and Drug Administration PRC (the "sFDA"). This
transfer and all other corresponding obligations were completed and such amount
was recognized as license revenue during the fiscal year ended June 30, 2007.

      Double-Crane intends to pursue an intraoperative and postoperative
transfusion avoidance endpoint. Double-Crane's clinical development plan
incorporates a new protocol design that is intended to build on the previously
conducted Alliance Phase 2 and Phase 3 clinical trials. In these studies, the
efficacy of OXYGENT in terms of drug activity (i.e., its ability to deliver
oxygen) enabled patients to remain physiologically stable at lower
intraoperative hemoglobin ("Hb") levels. OXYGENT was shown to be statistically
better than blood in reversing, as well as maintaining reversal of,
physiological transfusion triggers. Importantly, the Double-Crane study will not
employ any blood harvesting techniques (i.e., acute normovolemic hemodilution or
intraoperative autologous donation), which were implicated in safety issues in a
previous Alliance Phase 3 clinical trial.

      Double-Crane is obligated pursuant to its agreement with Alliance to
conduct clinical trials in China in accordance with the International Conference
on Harmonization of Technical Requirements for Registration of Pharmaceuticals
for Human Use (the "ICH") Guidelines, which would allow Alliance to use any data
derived from the clinical trials in other countries.

      Double-Crane will have the option to manufacture OXYGENT in the PRC after
obtaining approval from the regulatory authorities in the PRC and they will also
have a right of first refusal to add specific additional countries to the
territory contemplated by the Double-Crane Agreement upon further negotiation
with the Company.

      Following a joint steering committee meeting during November 2007 in
China, Alliance updated its clinical development plan for OXYGENT to focus
primarily on supporting the initial clinical development of OXYGENT in China. As
a result, the Company discontinued enrollment in the postoperative ileus study
in France. Some of the physiological endpoints in the French protocol may be
incorporated into the Chinese study protocol and, in addition, Alliance is
evaluating a new protocol for Europe to correspond to the China Phase 2 study.

3.    DEBT OBLIGATIONS

SENIOR NOTES PAYABLE

      On July 2, 2004, Nycomed Denmark ApS ("Nycomed") notified the Company that
it was unilaterally terminating its Development, Assignment and Supply Agreement
(the "Nycomed Agreement") effective August 16, 2004. Subsequently, a dispute
arose between the Company and some of its investors who participated in the June
2004 Private Placement. After considering all of the facts and circumstances
relevant to the dispute, the Company's Board of Directors determined that it was
in the Company's and the Company's shareholders' best interests to offer, as a
settlement of the dispute, to rescind the June 2004 Private Placement.

      On September 24, 2004, investors holding 30,546,423 shares of common stock
and warrants to purchase 22,909,821 shares of common stock, representing
approximately $10.7 million of the $11 million invested in the June 2004 Private
Placement, elected to rescind the June 2004 Private Placement. In doing so, each
of these investors returned to the Company its stock certificate representing
the number of shares and the warrant that it received in the June 2004 Private
Placement for cancellation. Immediately thereafter, these same investors entered
into the Senior Note Purchase Agreement whereby the Company issued to such
investors Senior Notes convertible into common stock at $0.25 per share, which
was subsequently amended (see below), in principal amounts equal to the amounts
such investors invested in the June 2004 Private Placement.

      After giving effect to both transactions, the Company issued 880,714
shares of common stock and warrants to purchase 660,536 shares of common stock
in the June 2004 Private Placement, and the Company issued Senior Notes in an
aggregate principal amount of approximately $10.7 million.

      The Senior Notes were due March 24, 2006, and bore interest at 6% per
annum. In April 2006, the Company entered into the 2006 Amendment with each of
the existing holders of Alliance's Senior Notes. Pursuant to the 2006 Amendment,
the maturity date of each outstanding Senior Note was extended from March 24,
2006 to April 1, 2007. The conversion price of each Senior Note was reduced from
$0.25 to $0.17, and the interest that accrued on each Senior Note from March 25,
2006 through April 1, 2007 was increased from 6% to 10% per annum. In addition
to the amounts due under the Senior Notes, the holders of the Senior Notes are
entitled to receive up to an aggregate of $11.4 million in payments based on
future royalties from OXYGENT product sales (or under certain conditions from
milestone payments) payable at a rate equal to 50% of such payments Alliance
actually receives.

      The 2006 Amendment caused the Company to have an insufficient number of
authorized shares to settle all outstanding options, warrants and exercisable
convertible instruments until shareholders approved an increase in authorized
shares of common stock on November 14, 2006. As a result, under EITF 00-19, all
non-employee options and warrants were classified as derivative liabilities and
recorded at their fair values at each balance sheet date (see Note 1).

                                       12


<Page>

      On May 15, 2007, Alliance entered into an amendment (the "2007 Amendment")
of its Senior Convertible Promissory Note Purchase Agreement and Registration
Rights Agreement (as amended by the 2006 Amendment) with substantially all of
the existing holders of the Senior Notes. Pursuant to the 2007 Amendment, the
maturity date of each outstanding Senior Note was extended as follows:

      (a)   The maturity date was extended from April 1, 2007 to the date ninety
(90) days after the date of the 2007 Amendment. If the Company received more
than $1.5 million but less than $3 million in connection with a Qualified
Financing (as defined in the 2007 Amendment) prior to the expiration of the
ninety (90) days (which the Company did not receive), the maturity date would
have been automatically extended to the date that is one hundred eighty (180)
days after the date of the 2007 Amendment; and

      (b)   If the Company received at least $3 million in connection with a
Qualified Financing prior to the extended maturity date, the maturity date would
have automatically become June 30, 2008.

      The holders of the Senior Notes also agreed to subordinate their rights to
any debt that is issued in a Qualified Financing. Further, any financing that
qualifies as a Qualified Financing will not require additional approval from the
Senior Note holders.

      Alliance also agreed to issue to each current holder of a Senior Note an
additional note with principal amount equal to 20% of the outstanding principal
amount of such Senior Note on the date of the 2007 Amendment, which resulted in
Alliance issuing new promissory notes in the aggregate principal amount of
approximately $1.8 million, which was recorded as a loss on modification of debt
and was expensed primarily during the year ended June 30, 2007. These new notes
bear interest at the rate of 10% per annum, will mature on June 30, 2008 and may
become convertible into common stock of Alliance on the same terms as the Senior
Notes at such time as Alliance has a sufficient number of authorized and
unreserved shares of common stock to accommodate such conversion.

      The Company further agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders receive 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders will now receive payment sharing until 120% of the payment participation
amounts have been received if they continue to hold their Senior Notes through
June 30, 2008.

      The Company was unable to complete a Qualified Financing by the requisite
dates. As a result, the Company is in default under the Senior Notes in the
aggregate principal and interest amount of approximately $10.7 million. Alliance
is continuing to seek additional financing that would qualify as a Qualified
Financing for the purpose of funding its continuing operations through June
2008. Under the current plan, Alliance has enough funds to operate through
February 2008.

      The Senior Notes can be converted at anytime prior to the maturity date.
During the six months ended December 31, 2007, holders of certain Senior Notes
converted an aggregate of approximately $2.1 million in principal and
approximately $108,000 in accrued interest into an aggregate of 12,780,018
shares of our common stock at a conversion price of $0.17 per share. Also during
the six months ended December 31, 2007, we recorded a loss on modification of
debt of $14,000 resulting from the issuance of an additional note in connection
with the 2007 Amendment. At December 31, 2007, the principal and accrued
interest balances approximate $8.2 million and $2.5 million, respectively.

INDEMNIFICATION OBLIGATIONS

      The Company has undertaken certain indemnification obligations pursuant to
which it may be required to make payments to an indemnified party in relation to
certain transactions. The Company has agreed to indemnify its directors,
officers, employees and agents to the maximum extent permitted under the laws of
the State of New York. In connection with its facility leases, the Company has
agreed to indemnify its lessors for certain claims arising from the use of the
facilities. In connection with certain of its debt, stock purchase and other
agreements, the Company has agreed to indemnify lenders, sellers and various
other parties for certain claims arising from the Company's breach of
representations, warranties and other provisions contained in the agreements.
The duration of certain of these indemnification obligations does not provide
for any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make any
payments for these obligations and no liabilities have been recorded for these
indemnities in the accompanying unaudited condensed consolidated balance sheet.

4.    EQUITY

PREFERRED STOCK

      In May 2000, Alliance entered into a joint venture with Baxter and sold
them 793,750 shares of its Series F Preferred Stock. The Series F Preferred
Stock has no annual dividend and is not entitled to any voting rights except as
otherwise required by law.

                                       13


<Page>

      In March 2004, Alliance terminated its license agreement with PFC
Therapeutics and therefore, per the terms of the joint venture with Baxter, the
conversion price of the Series F Preferred Stock to common stock is fixed at $50
per common share. Based on this conversion price, the outstanding shares of
Series F Preferred Stock are convertible into 635,000 shares of common stock.
The Company has accounted for the Series F Preferred Stock as a component of
stockholders' equity.

COMMON STOCK

      During the six months ended December 31, 2007, holders of certain Senior
Notes converted an aggregate of approximately $2.1 million in principal and
approximately $108,000 in accrued interest into an aggregate of 12,780,018
shares of our common stock at a conversion price of $0.17 per share (see Note
3).

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

(References to years are to our fiscal years ended June 30.)

PLAN OF OPERATION

      Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and, as of
December 31, 2007, have an accumulated deficit of $498.8 million. If we are able
to obtain necessary financing, we expect to incur significant operating losses
over at least the next few years as we continue our research and product
development efforts and attempt to commercialize our products. The Company is
continuing to seek additional financing to fund its continuing operations
through June 2008. Because adequate funds have not been available to the Company
in the past, the Company has already delayed its OXYGENT development efforts and
has delayed, scaled back, and/or eliminated one or more of its other product
development programs (see Note 1 to the accompanying unaudited condensed
consolidated financial statements and the "Liquidity and Capital Resources"
section below).

      Our revenues from operations have come primarily from collaborations with
corporate partners, including research and development, milestone and royalty
payments. Our expenses have consisted primarily of research and development
costs and administrative costs. To date, our revenues from the sale of products
have not been significant. We believe our future operating results may be
subject to quarterly fluctuations due to a variety of factors, including the
timing of future collaborations and the achievement of milestones under
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development.

FORWARD-LOOKING INFORMATION

      Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2008, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include, but are
not limited to, the ability of the holders of the Senior Notes to demand payment
of the amounts due under the Senior Notes; the inability to obtain adequate
financing for the Company's development efforts and general corporate needs; the
inability to enter into collaborative relationships to further develop,
manufacture and commercialize the Company's products; changes in any such
relationships, or the inability of any collaborative partner to adequately
commercialize any of the Company's products; the uncertainties associated with
the lengthy regulatory approval process, including uncertainties associated with
FDA decisions and timing on product development or approval; and the
uncertainties associated with obtaining and enforcing patents important to the
Company's business; and possible competition from other products. Furthermore,
even if the Company's products appear promising at an early stage of
development, they may not reach the market for a number of important reasons.
Such reasons include, but are not limited to, the possibilities that the
potential products will be found ineffective during clinical trials; failure to
receive necessary regulatory approvals; difficulties in manufacturing on a large
scale; failure to obtain market acceptance; and the inability to commercialize
because of proprietary rights of third parties. The research, development and
market introduction of new products will require the application of considerable
technical and financial resources, while revenues generated from such products,
assuming they are developed successfully, may not be realized for several years.
Other material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product approvals
and introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible technology

                                       14


<Page>

and/or other business acquisitions or transactions; and the increasing emphasis
on controlling healthcare costs and potential legislation or regulation of
healthcare pricing. Further cautionary information is contained in documents the
Company files with the SEC from time to time, and you are encouraged to read the
section entitled "Risk Factors" included in the Company's most recently filed
Annual Report on Form 10-KSB filed with the SEC on September 28, 2007.

RESEARCH AND DEVELOPMENT

      For the six months ended December 31, 2007 and 2006, we incurred research
and development expenses of $260,000 and $1.3 million, respectively, for
OXYGENT, an intravascular oxygen carrier that we are developing to augment
oxygen delivery in surgical patients at risk of acute oxygen deficit. Research
and development costs to date for our oxygen-therapeutic product candidates,
including OXYGENT, total approximately $161 million. While difficult to predict,
we estimate that the completion of clinical trials for OXYGENT will cost at
least an additional $70 million. We do not anticipate that OXYGENT will reach
the market for at least a few years, if ever, and, because of the numerous risks
and uncertainties associated with product development efforts, we are unable to
predict the extent of any future expenditures or when material net cash inflows
from OXYGENT may commence, if at all.

      In January 2007, the French Ethics Committee (IRB) and the French
Competent Authority (regulatory agency) granted approval to start the Phase 2b
clinical trial for OXYGENT to prevent postoperative ileus resulting from hypoxia
during major surgery trial. Subsequently, Alliance submitted a clinical trial
protocol revision to the French Ethics Committee and the French Competent
Authority, which modified the dosing regimen to a dose-escalation protocol. This
modification, which was approved in May 2007, allowed for the safety and
efficacy to be evaluated in three dose levels. Alliance initiated the trial, but
in November 2007, following a steering committee meeting with Double-Crane in
China, Alliance discontinued enrollment in the French study and is evaluating a
new protocol to correspond to the China Phase 2 study (see Note 2 to the
accompanying unaudited condensed consolidated financial statements).

      On February 6, 2007, we announced the manufacture and release for shipment
of OXYGENT for clinical trials. Alliance has now successfully completed the
contract manufacture of OXYGENT clinical trial material.

      On March 15, 2007, we announced that, in accordance with the current
regulations of the sFDA, the supplies for an IND application and clinical
development must be manufactured in a facility in China. As a result, Alliance
agreed to accelerate the manufacturing technology transfer to Double-Crane,
which originally was planned to occur when Phase 3 trials were initiated in
China. Once clinical supplies are manufactured by Double-Crane, Double-Crane has
indicated that it will submit its IND application for initiation of the agreed
upon clinical development plan. Double-Crane expects to start a Phase 1 safety
trial in Chinese nationals immediately after the sFDA approves the IND
application.

      Double-Crane has considerable experience in manufacturing large-volume
parenteral and IV solutions and has expressed a desire to supply Alliance with
clinical and commercial supplies of OXYGENT from its facilities in China. Supply
of OXYGENT to the U.S. would be contingent on Double-Crane's compliance with
Current Good Manufacturing Practices ("cGMP") and registration with the U.S.
FDA.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2007 AS COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 2006

      There was no revenue for the three months ended December 31, 2007 or for
the three months ended December 31, 2006.

      Research and development expenses decreased by $644,000, or 88%, to
$91,000 for the three months ended December 31, 2007, compared to $735,000 for
the three months ended December 31, 2006. The decrease in research and
development expenses was primarily due to the completion of production of
clinical trial material in an FDA-approved GMP facility during the previous
fiscal year and a decrease during the current quarter of activities for our
Phase 2b postoperative ileus clinical study in France, which we discontinued
during the current quarter.

      General and administrative expenses decreased by $410,000, or 68%, to
$194,000 for the three months ended December 31, 2007, compared to $604,000 for
the three months ended December 31, 2006. The decrease in general and
administrative expenses was primarily the result of an accrual in last year's
quarter of $249,000 of possible income tax and penalty liabilities for tax year
2003 (fiscal year 2004), which was reversed upon further analysis, a decrease in
personnel expenses of $48,000, a decrease of $46,000 because of the postponement
of our annual meeting, a decrease in legal and accounting fees of $39,000, and a
decrease of $26,000 in office-related expenses since our relocation during the
current quarter.

      For the three months ended December 31, 2006, we recorded a gain on the
change in fair value of derivative liability of $130,000 related to recording
derivative liabilities at fair value in connection with the 2006 Amendment
entered into during April 2006 (see Note 1).

                                       15


<Page>

      For the three months ended December 31, 2006, we recorded a gain on the
disposition of an asset of $659,000 primarily related to $100,000 received per
the terms of an agreement with Imcor Pharmaceutical Co. ("Imcor") who acquired
certain assets and assumed certain liabilities related to our IMAGENT(R) product
and the reclassification of approximately $500,000 of deferred royalties during
the period in connection with the IMAGENT asset sale transaction.

      Investment income decreased to $4,000 for the three months ended December
31, 2007, compared to $34,000 for the three months ended December 31, 2006. The
decrease was primarily a result of a lower cash balance.

      Interest expense was $222,000 for the three months ended December 31,
2007, compared to $242,000 for the three months ended December 31, 2006. The
decreased interest expense for the current quarter was primarily the result of
lower Senior Note principal balances due to the conversion of certain principal
amounts into common stock.

SIX MONTHS ENDED DECEMBER 31, 2007 AS COMPARED WITH SIX MONTHS ENDED DECEMBER
31, 2006

      Our revenue increased to $57,000 for the six months ended December 31,
2007, compared to $27,000 for the six months ended December 31, 2006. This
increase was primarily due to an increase in royalties received from sales other
than IMAGENT.

      Research and development expenses decreased by $1.1 million, or 81%, to
$260,000 for the six months ended December 31, 2007, compared to $1.3 million
for the six months ended December 31, 2006. The decrease in research and
development expenses was primarily due to a decrease in contract manufacturing
of OXYGENT clinical trial material of $879,000, a decrease of $138,000 because
of the discontinued clinical trial in France and a decrease of $45,000 in
research and development personnel costs.

      General and administrative expenses decreased by $388,000, or 44%, to
$491,000 for the six months ended December 31, 2007, compared to $879,000 for
the six months ended December 31, 2006. The decrease in general and
administrative expenses was primarily the result of an accrual in last year's
period of $249,000 of possible income tax and penalty liabilities for tax year
2003 (fiscal year 2004) in connection with the sale of the IMAGENT assets, which
was reversed upon further analysis, a decrease of $54,000 in personnel costs, a
decrease of $46,000 in annual meeting-related expenses and a decrease of $30,000
in office-related expenses.

      For the six months ended December 31, 2007, we recorded a loss on
modification of debt of $14,000 resulting from the issuance of an additional
note in connection with the 2007 Amendment (see Note 3).

      For the six months ended December 31, 2006, we recorded a gain on the
change in fair value of derivative liability of $357,000 related to recording
derivative liabilities at fair value in connection with the 2006 Amendment
entered into during April 2006 (see Note 3).

      For the six months ended December 31, 2006, we recorded a gain on the
disposition of an asset of $659,000 primarily related to $100,000 received per
the terms of an agreement with Imcor and the reclassification of approximately
$500,000 of deferred royalties during the period in connection with the IMAGENT
asset sale transaction.

      Investment income decreased by $63,000 to $14,000 for the six months ended
December 31, 2007, compared to $77,000 for the six months ended December 31,
2006. The decrease was primarily a result of lower cash balances during the
current period.

      Other income was $163,000 for the six months ended December 31, 2007,
which was the result of proceeds recorded from the sale of raw material
inventory (which was previously written off).

      Interest expense was $465,000 for the six months ended December 31, 2007,
compared to $490,000 for the six months ended December 31, 2006. The decreased
interest expense for the current period was the result of lower Senior Note
principal balances due to the conversion of certain principal amounts into
common stock.

LIQUIDITY AND CAPITAL RESOURCES

      Since inception, we have funded our operations primarily through the sale
of equity securities, payments under our collaboration agreements and debt
financing. From inception to December 31, 2007, we had received $243 million in
net proceeds from sales of our equity securities, $260.8 million in payments
from collaboration agreements and $74.3 million in debt financing of which $41
million of such debt has been converted into equity and $25.9 million of such
debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock.

      At December 31, 2007, we had approximately $136,000 in cash and cash
equivalents compared to $873,000 at June 30, 2007. The decrease resulted from
the net cash used in operations of $737,000. At December 31, 2007, we had a
working capital deficit of $10.9 million, compared to a working capital deficit
of $12.1 million at June 30, 2007. The deficit decrease was principally due to a
net decrease in accounts payable and accrued expenses of $228,000 and the net
decrease in the Senior Note principal amounts and accrued interest of $1.7
million resulting from conversions into common stock, partially offset by the
net cash used in operations. Our operations to date have consumed substantial
amounts of cash and are expected to continue to do so for the foreseeable
future.

                                       16


<Page>

      Net cash used in operating activities totaled $737,000 for the six months
ended December 31, 2007, compared to $1.7 million for the six months ended
December 31, 2006. The decrease in net cash used in operating activities during
the six months ended December 31, 2007 was primarily due to a decrease in
payments for research and development activities.

      At December 31, 2007, the following approximate debt obligations were
outstanding:

      (a)   $231,000 owed to various vendors;

      (b)   $106,000 in accrued expenses;

      (c)   $100,000 in deferred revenue;

      (d)   $10.7 million in Senior Notes, including $2.5 million in accrued
            interest;

      (e)   $750,000 in deferred royalty payments to be paid through future
IMAGENT earn-out payments, if any. In the event there are no future IMAGENT
earn-out payments, the deferred royalties will not be paid.

      Until we can generate significant continuing revenues, we expect to
satisfy our future cash needs through strategic collaborations, private or
public sales of our securities, debt financings or by licensing all or a portion
of our product candidates or technology. We cannot be certain that additional
funding will be available to us on acceptable terms, or at all. If funds are not
available, we may be required to delay, reduce the scope of, or eliminate one or
more of our research and development programs or our commercialization efforts,
or we may be forced to cease operations all together.

      We believe we have working capital to fund our operations through February
2008; however, we do not have the resources to repay the Senior Notes, which are
now due and payable. Alliance intends to seek additional financing to fund its
continuing operations through June 2008. Further, we are seeking additional
collaborative research and development relationships with suitable corporate
partners for our products. Because adequate funds have not been available to us
in the past, we have already delayed our OXYGENT development efforts and have
delayed, scaled back, and/or eliminated one or more of our other product
development programs.

      The accompanying unaudited condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. We have incurred operating
losses through December 31, 2007. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

WHERE YOU CAN FIND MORE INFORMATION

      We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and must file reports, proxy statements and
other information with the SEC. The reports, information statements and other
information we file with the Commission can be inspected and copied at the
Commission Public Reference Room, 100 F Street, N.E. Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at (800) SEC-0330. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy, information statements and
other information regarding registrants, like us, which file electronically with
the Commission.

      We were incorporated in New York in 1983. Our principal executive offices
are located at 7590 Fay Avenue, Suite 402, La Jolla, California 92037, and our
telephone number is (858) 410-5200.

      Our common stock is traded on the OTCBB under the symbol "ALLP.OB."

CRITICAL ACCOUNTING POLICIES

      There were no significant changes in critical accounting policies or
estimates from those at June 30, 2007.

ITEM 3.  CONTROLS AND PROCEDURES

      (a)   Evaluation of Disclosure Controls and Procedures. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the

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Company's disclosure controls and procedures. Based upon that evaluation, our
CEO and CFO concluded that as of December 31, 2007 our disclosure controls and
procedures were effective at the reasonable assurance level in timely alerting
them to the material information relating to the Company (or the Company's
consolidated subsidiaries) required to be included in the Company's periodic
filings with the SEC, subject to the various limitations on effectiveness set
forth below under the heading, "Limitations on the Effectiveness of Internal
Controls," such that the information relating to the Company, required to be
disclosed in SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to the Company's management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.

      (b)   Changes in internal control over financial reporting. There has been
no change in the Company's internal control over financial reporting that
occurred during the six-month period ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS

      The Company's management, including our CEO and CFO, does not expect that
our disclosure controls and procedures or our internal control over financial
reporting will necessarily prevent all fraud and material error. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.

PART II OTHER INFORMATION:

ITEM 1.  LEGAL PROCEEDINGS

      None.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

      During the three months ended December 31, 2007, holders of certain Senior
Notes converted an aggregate of approximately $1 million in principal into an
aggregate of 5,904,164 shares of our common stock at a conversion price of $0.17
per share.

      The offers and sales of these securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, (the "Securities
Act") in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder as transactions by us not involving a public offering.
The recipients of the securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to share certificates issued in such transactions. All recipients
had adequate access to information about us.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      On May 15, 2007, Alliance entered into the 2007 Amendment of its Senior
Convertible Promissory Note Purchase Agreement and Registration Rights Agreement
(as amended by the 2006 Amendment) with substantially all of the existing
holders of the Senior Notes. Pursuant to the 2007 Amendment, the maturity date
of each outstanding Senior Note was extended as follows:

      (a)   The maturity date was extended from April 1, 2007 to the date ninety
(90) days after the date of the 2007 Amendment. If the Company received more
than $1.5 million but less than $3 million in connection with a Qualified
Financing (as defined in the 2007 Amendment) prior to the expiration of the
ninety (90) days (which the Company did not receive), the maturity date would
have been automatically extended to the date that is one hundred eighty (180)
days after the date of the 2007 Amendment; and

      (b)   If the Company received at least $3 million in connection with a
Qualified Financing prior to the extended maturity date, the maturity date would
have automatically become June 30, 2008.

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<Page>

      The holders of the Senior Notes also agreed to subordinate their rights to
any debt that is issued in a Qualified Financing. Further, any financing that
qualifies as a Qualified Financing will not require additional approval from the
Senior Note holders.

      Alliance also agreed to issue to each current holder of a Senior Note an
additional note with principal amount equal to 20% of the outstanding principal
amount of such Senior Note on the date of the 2007 Amendment, which resulted in
Alliance issuing new promissory notes in the aggregate principal amount of
approximately $1.8 million, which was recorded as a loss on modification of debt
and was expensed primarily during the year ended June 30, 2007. These new notes
bear interest at the rate of 10% per annum, will mature on June 30, 2008 and may
become convertible into common stock of Alliance on the same terms as the Senior
Notes at such time as Alliance has a sufficient number of authorized and
unreserved shares of common stock to accommodate such conversion.

      The Company further agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders receive 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders will now receive payment sharing until 120% of the payment participation
amounts have been received if they continue to hold their Senior Notes through
June 30, 2008.

      The Company was unable to complete a Qualified Financing by the requisite
dates. As a result, the Company is in default under the Senior Notes in the
aggregate principal and interest amounts of approximately $10.7 million.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

ITEM 5.  OTHER INFORMATION

      (a)   DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.

      On February 12, 2008, Edward C. Hall, resigned as our part-time Chief
Financial Officer. Mr. Hall is leaving the Company to focus on a full-time
position at another company.

ITEM 6.  EXHIBITS

      (a)   Index to Exhibits

EXHIBIT       DESCRIPTION

     31.1     Certification of our Chief Executive Officer, pursuant to
              Securities Exchange Act Rule 13a-14(a) and 15d-14(a) as adopted
              pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

     31.2     Certification of our Chief Financial Officer, pursuant to
              Securities Exchange Act Rule 13a-14(a) and  15d-14(a) as adopted
              pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

     32.1     Certification of our Chief Executive Officer under Section 906 of
              the Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

     32.2     Certification of our Chief Financial Officer under Section 906 of
              the Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

------------
*  Filed Herewith.


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                                   SIGNATURES

      In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                        ALLIANCE PHARMACEUTICAL CORP.

                                        (Registrant)

Date: February 12, 2008                 By: /s/ DUANE J. ROTH
                                            ------------------------------------
                                            Duane J. Roth
                                            Chairman and Chief Executive Officer


                                        By: /s/ EDWARD C. HALL
                                            ------------------------------------
                                            Edward C. Hall
                                            Chief Financial Officer



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